The advised versus non-advised debate currently bubbling away in the industry is a fascinating one. Is this a battle between the dark side and the light, or between innovators trying to push the industry forward to cover more lives and established distributers holding it back for their own protectionist ends?
As someone on the periphery of the long-term protection insurance market, I would suggest two litmus tests.
The first is who derives the greater benefit from a non-advised sale: does the customer get a better deal and a more convenient sales process when compared to an advised sale, or does the distributor get to maximise its profits due to lower compliance overheads and a contracting out of liability?
The second is what would happen if the Financial Conduct Authority (FCA) were to ban human non-advised sales: would non-advised brokerages stop trading, depriving people of access to important insurance products, or would they quickly adapt to an advised model to remain in business?
I confess that these questions are somewhat loaded, and that the answers will be obvious to readers of this publication.
Regulator failings
When the then-Financial Services Authority formulated the concept of advised and non-advised sales, it created a distinction that is practically meaningless to consumers at the point of sale, but rather more meaningful at the point of claim or complaint.
It also failed to foresee how non-advised sales would play out at the coalface – the various techniques that would be developed to lead customers, and the fine line between advice and non-advice that many salespeople find it impossible not to cross when trying to sell financial products over the telephone.
Some have suggested that non-advised be renamed as ‘guidance’, but this only serves to further obfuscate the difference between advised and non-advised.
In the minds of most consumers, there is little to no difference between guidance and advice.
Further, if you guide a customer down a particular path for financial reward, with all of the information asymmetries that exist between firms and consumers in financial services, why should you be absolved of the liability for that guidance?
Blurring of PMI sales
The debate has so far been centred on the long-term protection insurance market where the issue is more prevalent, but non-advised can serve a different purpose in the private medical insurance (PMI) market.
PMI is an annually renewable product with long-term underwriting, and auto-renewal is therefore permitted to ensure that customers do not lose cover for pre-existing conditions.
Alongside this, brokers have an obligation to notify renewal and provide various disclosures to the customer, including the contentious shopping around notice.
Some clients will not wish to engage with a fully advised renewal process and it is generally considered that a personal recommendation cannot be made if the broker has not had the opportunity to re-assess the client’s demands and needs.
These obligations on brokers mean that tacit renewals will be non-advised and that there will often be a combination of an advised sale and non-advised renewal(s) on the same contract.
This is arguably little more than a regulatory quirk, but while the regulator does not make a distinction between the sale of a PMI policy and its subsequent renewal, the concept of a non-advised transaction is a necessary one.
This issue partly reflects the uniqueness of PMI and its nestling between general insurance proper and long-term protection insurance, but the call for sector-specific regulation is another subject.
Create clear distinction
If there is a third way, it is to create a clearer distinction between advised and non-advised sales in the minds of consumers.
Those who wish to undertake non-advised sales should be required to include a mandatory statement on the first page of their documentation, reminding the client that the sale is non-advised and informing them that they have the option to take advice if they want greater consumer protection.
This may sound outlandish, but it is no different from general insurance brokers being required to suggest that their customers shop around.
And to create further differentiation, those who wish to undertake advised sales should adhere to a higher standard and be qualified to minimum of level 3 (Cert CII, CertPFS or equivalent).
I am not suggesting that qualifications are the be-all and end-all, but they do set a minimum standard, create a barrier to entry, and avoid a situation where advisers are, on paper, no more qualified than the customers they are advising.